Aurora Cannabis Keeping Up with Canopy with Liquor Investment

SmallCapPower | February 6, 2018: Aurora Cannabis Inc. (TSX:ACB) announced on Monday that it is going to make a strategic investment in Liquor Stores N.A. Ltd. (TSX:LIQ) through a non-brokered private placement. The private placement will be conducted in two phases – initial investment of $103.5 million for ownership of 19.9% in Liquor Stores; additional investment through subscription of subscription receipts and share purchase warrants, which could increase Aurora’s stake in Liquor Stores up to ~40%.

Liquor Stores will use the private placement to set up and launch cannabis retail outlets – converting existing retail outlets into cannabis retail outlets and establishment of new cannabis retail outlets. A portion of the net proceeds from the private placement will be utilized to strengthen existing liquor retail brands through renovation of liquor store outlets as well as general corporate purposes.

Both companies should benefit through this deal. Aurora’s brand leadership, quality products, customer care, innovation and deep product knowledge will strongly complement Liquor Stores’ well-established distribution network, best retail practices of adult use-controlled products, regulatory compliance commitment, and wide talent pool with over 2,000 retail employees. Through this private placement, Liquor Stores will be positioned as a leading retail brand in the cannabis sector.

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Terry Booth, CEO of Aurora Cannabis, said, “The Private Placement with Liquor Stores is transformational in scale and scope for Aurora, Liquor Stores and the cannabis industry in Canada, providing the opportunity for our companies to establish a leading private retail footprint in Western Canada. This is an extremely significant step in our corporate development, as we prepare with our partners at Liquor Stores to bring the Aurora Standard in product quality, customer care and strategy execution to the pending legal consumer cannabis market.”

Liquor Stores operates 231 retail liquor stores across North America – Alberta, British Columbia, Alaska and Kentucky. The company’s outlets operate under brand names Liquor Depot and Wine and Beyond in Alberta; Liquor Depot and Wine Cellar in British Columbia; Brown Jug in Alaska and The Ultimate Party Source in Kentucky.

Initial Phase of Investment

The initial investment of $103.5 million will be through subscription of 6.9 million common shares of Liquor Stores at a share price of $15, which will result in 19.9% ownership. For initial stake buying, approval of Liquor Stores’ shareholders is not expected, and the transaction is expected to close by February 14, 2018.

Subsequent Phase of Investment

Aurora Cannabis is going to subscribe to 2.3 million subscription receipts of Liquor Stores for net aggregate of $34.5 million ($15 per subscription receipts). This receipt purchase will increase Aurora’s ownership in Liquor Stores to approximately 25% (on a non-diluted basis).

Additionally, two classes of share purchase warrants by Liquor Stores will be issued to Aurora Cannabis:

10,130,00 warrants (sunshine warrants) at an exercise price of $15.75 per share, allowing Aurora Cannabis to enhance its pro rata equity interest in Liquor Stores to 40% on a fully-diluted basis

Up to 1,750,000 warrants (pro rate warrants) to be exercised by Aurora Cannabis at an exercise price of $15.00 upon any conversion of any of the outstanding 4.70% convertible unsecured subordinated debentures of Liquor Stores, allowing Aurora Cannabis to maintain its pro rata equity interest in Liquor Stores

Both the exercise of warrants will depend on approval of Liquor Stores shareholders at the next annual general meeting.

On October 30, 2017, alcohol beverage giant Constellation Brands announced that it would acquire a nearly 10% stake in Canopy Growth Corporation (TSX:WEED), which seem to legitimize the cannabis industry in the eyes of many investors.

Aurora Cannabis operates a 55,200 square foot production facility in Mountain View County, Alberta, known as “Aurora Mountain,” a 40,000 square foot production facility known as “Aurora Vie” in Pointe-Claire, Quebec, and an 800,000 square foot production facility, known as “Aurora Sky,” at the Edmonton International Airport. The Company is also constructing a fourth facility of 48,000 square feet in Lachute, Quebec, and will soon begin construction on a 1,000,000 square foot production facility in Odense, Denmark, which will be called “Aurora Nordic,” through a joint venture with Alfred Pedersen & Son ApS.

Aurora Cannabis’ private placement in Liquor Stores reflected positively on the Company’s stock, as it gained 8.8% on the TSX on Monday and closed at $9.25. Aurora Cannabis currently trades at a market cap of $4.35 billion; 187.1x its TTM sales of $23.25 million.

Disclosure: Neither the author nor his/her family own shares in any of the companies mentioned above.

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